Total retail sales for October were unexpectedly solid, up 0.4 percent. Auto sales exhibited strange quantum-mechanical behavior by going up and down at the same time. Separately-reported unit auto sales fell in October from a 15.3 million unit rate in September to 15.2 million. However, the retail sales version of auto sales increased by 1.3 percent in October. Go figure. Building materials sales declined by 1.9 percent for the month, consistent with increasing headwinds for the housing market. Service station sales dipped by 0.6 percent as gasoline prices dropped. Core components of retail sales were positive, suggesting that consumers did what they do best despite their grumbling confidence. Consumers caught a break from falling gasoline prices which held the overall CPI in check in October; it fell slightly by 0.1 percent. Gasoline prices dipped 2.9 percent for the month, and are 10.1 percent below a year ago. Just in time for holiday shoppers! The core CPI (less food and energy) gained 0.1 percent and is up 1.7 percent from a year earlier. The core CPI has more weight given to housing and house prices and rents are going up.

In a recent speech, FOMC Chairman Ben Bernanke explained the evolution of the Fed’s forward guidance. The current template is so-called state-contingent guidance. State-contingent guidance links Fed policy to the state of the economy, as indicated by economic metrics. This is apparent for the fed funds rate. The Fed has linked the near-zero fed funds rate to an unemployment rate threshold of 6.5 percent. The Fed also appears to be debating whether or not to lower the unemployment rate threshold, thus extending its near-zero interest rate policy. State-contingent guidance is less visible concerning the Fed’s ongoing asset purchase program, QE3. In his speech, Bernanke linked QE3 to labor market conditions. However, he decoupled that link by saying that asset purchases are not on a preset course. To the extent that the unemployment rate is not on a preset course, that makes sense. But when the Fed’s own projections show a declining unemployment rate, that implies a broadly defined course for QE. Perhaps, analogous to the Heisenberg Uncertainty Principle, we won’t know both the magnitude and direction of future QE at the same time. In the minutes of the October 29/30 FOMC meeting, members appear to have backed away from state-contingent guidance for QE3. Moreover, there was some debate within the FOMC about how to issue forward guidance once the state-specific threshold for fed funds is reached. Regarding forward guidance, the Fed is running into a conundrum. In their effort to refine guidance they may unintentionally increase uncertainty.

Market Reaction: Equity markets are down following the release of the FOMC minutes. The 10-year Treasury yield is up to 2.77 percent. NYMEX crude oil is up to $93.39/barrel. The dollar is down against the yen and down versus the euro.